Biggest threat to recovery is premature idea that our problems have been licked
The latest OECD report highlights the lack of proper evaluation in the vital area of education, says Colm McCarthy
THE Paris-based OECD is the intergovernmental think-tank of the more developed world economies. Its membership includes the European countries, the USA, Canada, Japan, South Korea, Singapore, Australia and various other middle- and high-income countries.
Every two years, the OECD prepares a 'survey' of each of the member economies, identifying weaknesses and priorities for policymakers. Its most recent report on Ireland was released on Thursday last.
The OECD is funded by the members and its reports are reviewed in draft by the member states before they are released. They are rarely a source of discomfort to the governments concerned. This is not to say that the OECD is not a valuable international organisation: it is a unique repository of comparative data and analysis across a wide range of policy areas. But it does not shoot from the hip. Along with the IMF, the European Commission and the ECB, it gave high marks to Irish policy throughout the bubble years leading up to the crash of 2008.
The overall thrust of the OECD's commentary on macroeconomic policy is rather upbeat: fiscal consolidation is on track, the employment numbers are looking a little better and the country is scheduled to exit the EU/IMF rescue programme at the end of 2013. Downside risks receive less emphasis than in, for example, recent analyses from the IMF. There are plenty of downside risks, including further financial sector trouble, a slow international recovery and the continuing failure at European level to fix the faulty eurozone architecture. Media attention has naturally focused on the OECD's view about the degree of fiscal correction to be aimed at on October 15, when the 2014 Budget is due to be unveiled.
Tanaiste and Labour leader Eamon Gilmore is on the public record to the effect that cuts and tax increases below the programme target of €3.1bn should be aimed at. Here in Ireland, the independent Fiscal Council, the ESRI and the Central Bank have all backed sticking to the €3.1bn figure, on the grounds that access to debt markets could be compromised if there is seen to be any backsliding. The Troika holds the same view. Many politicians would seem to prefer budget deficits at the limit of what the Troika is willing to countenance.
It must be conceded to Mr Gilmore's position that there is some ambiguity about the extent of the deficit-cutting commitment. On some readings, the troika programme adjustment for 2014 is cast in terms of a specific monetary figure – €3.1bn in cuts and tax increases. But there are also references to a target expressed as a percentage of GDP and, depending on the forecast figure for this number, an adjustment of €2.5bn or so might be enough.
If you believe that the budget deficit in any year should be pitched at the maximum level possible, there is arguably some leeway to shoot for a number below €3.1bn. However everybody knows that the deficit will have to be cut to zero at some stage and ideally as soon as possible. Any relaxation next year postpones that happy event. Why ease up just because the winning post is finally looming into view?
There is really only one coherent argument for slowing down the pace of adjustment, and that is a belief that the economy's medium-term prospects would be enhanced by delaying the approach to budget balance.
Opinion among economists is divided on this issue. The immediate impact of cuts and tax increases is deflationary, as well as politically unpopular. But the restoration of credit-worthiness to both the Government and the private economy matters, too, and could be threatened by any appearance of slackening off in the commitment to fixing the budget.
Ireland's budget deficit is unsustainable at current levels and the risk of another cut-off in external credit is very real. From next year onwards there is no more access to borrowing from the EU and the IMF. All of the Government's future planned deficits will have to be sourced in the open market, as well as the sizeable amounts needed to refinance maturing debt. The temporary respite of a lower deficit-cutting target in 2014 could be eroded very quickly if the credit markets get jittery again next year.
The OECD report commends the efforts to rein in the deficit and concedes that the sooner this can be done the better. But the organisation's secretary-general, Angel Gurria, seemed rather relaxed about a lower deficit-cutting target on Thursday.
The OECD has some specific criticisms, including some which are repeats of points made in its last report on Ireland two years ago. On the jobs market, there are criticisms of policy that fails to focus sufficiently on long-term unemployment. The report calls for changes to tax and welfare policies, hardly surprising given that the present Government has raised the minimum wage and increased the tax take at lower incomes.
Noting that job losses have been concentrated disproportionately among construction and other blue-collar workers, the report calls for education and training programmes to focus on providing the skills needed in the sectors likely to expand, a category which hardly includes construction. Changing Ireland's education and training system is like trying to berth a super-tanker. It is simply not designed for agility.
A striking example is the recent growth in the export of support services by the technology companies, which has created a strong demand for personnel with skills in modern European languages. Some of the companies have had to recruit directly abroad, while the education industry continues to devote inadequate resources to language tuition. Very few Irish students leave school with a serious command of French, German or Spanish. They have supposedly mastered Irish, but this is just a comforting evasion. Any attempt to equip students with decent second-language competence will fail unless modern languages are introduced in primary school, but few politicians appear willing to tackle the issue.
Irish governments have been spending prodigious sums for many a long year on science and technology programmes, with numberless official reports on innovation policy. The OECD is clearly not impressed. Innovation support programmes should have sunset clauses, according to the OECD; that is, they should fold automatically after a period of years unless a thorough re-evaluation justifies their extension. The report asserts that there are grave uncertainties about the effectiveness of much Irish public spending in this area.
One of the weaknesses in Irish policy formulation is that the departments and agencies which oversee certain spending programmes, including education, training and innovation, are also the ones charged with their evaluation. Consultants employed to evaluate these programmes invariably recommend that current policy be intensified. They would never be hired again if they recommended anything else. It is difficult to recall a single instance where a policy evaluation in Ireland has concluded 'This is a waste of time and money and should be scrapped'. It is very clear from the report that the OECD believes there are plentiful candidates for scrapping.
The biggest risk to a successful emergence from the travails of the last five years is a premature perception that the problems have been licked. The public finances are not sustainable without further cuts and tax hikes. Dysfunctional and costly policies remain in areas, including education, training and innovation, which are rarely subjected to proper scrutiny.
Efforts to trim public spending on low-priority programmes have been successfully resisted by vested interests, as have efforts to bring competitive forces into play in the provision of professional services. It would be a pity if the OECD report's rather indulgent tone were to fuel any complacency about the scale of the tasks yet to be addressed.